Blog: The discount rate review – calling King Solomon

The government has finally given the green light for the review of the discount rate. Justice Secretary David Gauke MP is expecting to announce the new rate by 5 August 2019.

The rate is calculated by reference to returns on low risk investments, typically index-linked gilts. The yield on these gilts, has fallen dramatically since the global financial crisis in 2009. Lower yields mean less compensation available to pay for key future losses such as care.

This was the prime factor behind then Lord Chancellor Liz Truss’ decision to cut the DR from 2.5% to minus 0.75%, Explaining her decision, she noted: “The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.” Insurers had a different view of the decision and lobbied hard to persuade the government to insert new measures to calculate the rate into the Civil Liability Bill.

During the passage of the Bill through Parliament, MPs and peers heard from ministers that the UK’s discount rate was one of the lowest in the world, and thus too generous. These were similar to arguments deployed by the Conservatives before they hollowed out Legal Aid.

Insurers have a fiduciary duty to their shareholders, but they also have a duty to protect people in the event of a major injury. It is surely appropriate for claimants to adopt a cautious approach to investing, given the serious consequences of running out of money, both for the claimant, and also for the taxpayer, as the state would need to provide a safety net. 

The stakes are high. A seriously injured 15-year-old who requires lifetime care may need £250,000 per year to pay for it; under the previous rate of 2.5% the capital value they would receive was £8.5m, but under the current government-sanctioned rate of minus 0.75% it would be £23.5m.

Whatever the review body decides, the decision is not an easy one, and fraught with moral, ethical and financial hazards. Where is King Solomon when you need him?

In the meantime, law firms are representing clients who have been caught up in this no-man’s land since 2017 have another four months to wait. These are real people, who are dealing with terrible misfortune, facing delays in cases while defendants hope that they settle under a higher rate. That is why the prospect of certainty from the new rate, and a mechanism for periodic review, will be good for the whole sector.

Our first duty as a society should be to injured people. After all, we pay for compulsory motor insurance to protect ourselves against serious injuries which we hope will never happen. In light of this, the needs and concerns of injured people must be foremost in the minds of both the review team and, ultimately, the Lord Chancellor, as they set about their task.

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